My daughter is turning 18 shortly. She has 5K in a deposit account from various gifts. Someone suggested to me that she should set up a PRSA for tax free accumulation. I will be paying for her college education. What do you think is the best way to invest the deposit and possible future small gifts?
18 year old - best investment?
- Thread starter hubble
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I set out some of the arguments for making a payment to a PRSA at 18 in this blog post
globalwealth.ie
I Don't Believe in Pensions - Everlake
Why we should continue to believe in pensions and start paying contributions to a pension as soon as we can.
globalwealth.ie
Brendan Burgess
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Hi hubble
Your daughter should not contribute to a pension.
Even if someone can use a set of assumptions to show that by age 65, she will be financially better off, she will have better use for that money over the next 10 years or so. She might use it as the start of a deposit on a house. She might use it to travel after college. She might use it so that she does not need to work nights while in college.
Even if she does not use it until she starts working, she can then get better value by contributing it then to a pension and getting tax relief on it when she is paying tax at her marginal rate.
Brendan
Your daughter should not contribute to a pension.
Even if someone can use a set of assumptions to show that by age 65, she will be financially better off, she will have better use for that money over the next 10 years or so. She might use it as the start of a deposit on a house. She might use it to travel after college. She might use it so that she does not need to work nights while in college.
Even if she does not use it until she starts working, she can then get better value by contributing it then to a pension and getting tax relief on it when she is paying tax at her marginal rate.
Brendan
Brendan Burgess
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She should simply buy an ETF and sit on it until she needs it.
It will go up and down in value. And it will be a useful lesson in the stockmarket.
Brendan
It will go up and down in value. And it will be a useful lesson in the stockmarket.
Brendan
moneymakeover
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would there be income tax for a college going student with no income?
moneymakeover
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Suggest, sign up to degiro and pick an etf
eg
iShares S&P 500 ISSP
Vanguard S&P500
eg
iShares S&P 500 ISSP
Vanguard S&P500
would there be income tax for a college going student with no income?
That’s an important point.
All income and gains are subject to a flat rate of exit tax of 41% even for non taxpayers with no earned income.
So an ETF in this situation is a very poor suggestion
Very unfair to both students and retired people.
We can of course get around this if you have 100 grand or more but in this case it’s looking like
State Savings Certs for money that needs to stay in cash and the balance to a PRSA actually represents the mathematically optimum strategy here
That’s an important point.
All income and gains are subject to a flat rate of exit tax of 41% even for non taxpayers with no earned income.
So an ETF in this situation is a very poor suggestion
Very unfair to both students and retired people.
We can of course get around this if you have 100 grand or more but in this case it’s looking like
State Savings Certs for money that needs to stay in cash and the balance to a PRSA actually represents the mathematically optimum strategy here
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I hate to say this, but thinking back to when I was 18, let the poor girl live a little - she will be saving and working and thinking of a pension for long enough. Maybe she wants to travel, or put it towards college expenses etc. If this year has taught us anything, it's that it's ok to live a little in the moment - yes pensions are crucial, but at 18, you also need to enjoy yourself - life is too short!
Have you asked her what she wants to do with it? She is 18 and it is her money after all!
Have you asked her what she wants to do with it? She is 18 and it is her money after all!
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You’ve uncovered the fundamental weakness with AAM we don’t get to meet the lady in question.
Economists use the term utility to describe the pleasure or satisfaction that a consumer obtains from his or her consumption of goods and services. ... Utility is a subjective measure of pleasure or satisfaction that varies from individual to individual according to each individual's preferences.
We don’t know her preferences and therefore can only postulate what is “best” for her in an abstract mathematical sense.
It really does hit home the need for face to face advice when making these sorts of decisions
Economists use the term utility to describe the pleasure or satisfaction that a consumer obtains from his or her consumption of goods and services. ... Utility is a subjective measure of pleasure or satisfaction that varies from individual to individual according to each individual's preferences.
We don’t know her preferences and therefore can only postulate what is “best” for her in an abstract mathematical sense.
It really does hit home the need for face to face advice when making these sorts of decisions
Brendan Burgess
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Hi Marc
This is a bit of an unusual question in that the poster is asking on behalf of someone else. Most posters ask about their own situation.
Looking for a mathematical answer is the wrong approach here. We do not know her future needs and neither does she. So for that reason, she must keep it outside a pension.
An execution-only ETF seems like the best idea.
Brendan
Brendan
An observation this would be the case in 100% of posts involving saving for a minor, as it would a bare trust or similar solution; and I would venture, most cases involving a young adult with little or no investment experience.
By your reasoning nobody would ever invest because the future cannot be known with certainty so therefore everyone should always save in a traditional bank account.
that is patently not the case, and some people decide to invest some of their money as a form of deferred consumption having taken care of immediate saving needs.
so if it is the case that she could/should invest some of it then the question is simply what it is the most suitable and appropriate investment?
my blog post argues that many people don’t make pension contributions in their early life partially because well meaning people advise them against it - as indeed you are doing.
they conclude, as you are doing, that there are better uses for “this money” in the future so therefore they should never commit it to a pension.
this is completely missing the point of my argument.
I am saying she should not invest in an ETF because in a very real and practical sense it is wholly unsuitable for the vast majority of Irish resident investors once one factors in the tax compliance issues which you gloss over in your response.
she could invest in an Irish unit linked policy from an insurance company but arguably should not do so either since net of cost and tax she is unlikely to make a profit in excess of a state savings certificate from a suitable balanced investment strategy which reflects the uncertainty around her future potential need to access the savings - your point.
so the logically conclusion is therefore that she should keep most of the capital in a state savings certificate as we set out here
globalwealth.ie
but make a modest contribution to a PRSA with a very high equity content.
if you have an age related allowance of 15% and pay say, €500 into a pension you obtain tax relief of 15% of €1525 or €228.75 which represents an effective rate of tax relief of 45.75%
the combined return of this strategy including the tax relief carried forward will under most circumstances provide a higher overall return net of costs and tax and certainly a higher return than an ETF net of tax and penalties for screwing up the tax return.
A detailed analysis of the comparison between gross roll up in a pension vs a taxable investment subject to exit tax are set out here
globalwealth.ie
An observation this would be the case in 100% of posts involving saving for a minor, as it would a bare trust or similar solution; and I would venture, most cases involving a young adult with little or no investment experience.
By your reasoning nobody would ever invest because the future cannot be known with certainty so therefore everyone should always save in a traditional bank account.
that is patently not the case, and some people decide to invest some of their money as a form of deferred consumption having taken care of immediate saving needs.
so if it is the case that she could/should invest some of it then the question is simply what it is the most suitable and appropriate investment?
my blog post argues that many people don’t make pension contributions in their early life partially because well meaning people advise them against it - as indeed you are doing.
they conclude, as you are doing, that there are better uses for “this money” in the future so therefore they should never commit it to a pension.
this is completely missing the point of my argument.
I am saying she should not invest in an ETF because in a very real and practical sense it is wholly unsuitable for the vast majority of Irish resident investors once one factors in the tax compliance issues which you gloss over in your response.
she could invest in an Irish unit linked policy from an insurance company but arguably should not do so either since net of cost and tax she is unlikely to make a profit in excess of a state savings certificate from a suitable balanced investment strategy which reflects the uncertainty around her future potential need to access the savings - your point.
so the logically conclusion is therefore that she should keep most of the capital in a state savings certificate as we set out here
How Do I Get The Best Return On My Savings? - Everlake
We strongly advocate that longer-term investments should be arranged via pensions and stock-market linked investment accounts.
globalwealth.ie
but make a modest contribution to a PRSA with a very high equity content.
if you have an age related allowance of 15% and pay say, €500 into a pension you obtain tax relief of 15% of €1525 or €228.75 which represents an effective rate of tax relief of 45.75%
the combined return of this strategy including the tax relief carried forward will under most circumstances provide a higher overall return net of costs and tax and certainly a higher return than an ETF net of tax and penalties for screwing up the tax return.
A detailed analysis of the comparison between gross roll up in a pension vs a taxable investment subject to exit tax are set out here
Personal Savings Accounts - Everlake
This guide sets out how a Personal Retirement Savings account (PRSA) combined with an Approved Retirement Fund (ARF) can be used by any Irish Investor between the ages of 18 and 75 to invest personal savings in a tax efficient way
globalwealth.ie
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Gordon Gekko
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Any type of pension structure probably misses the point. This is an 18 year old whose college education is being funded by the Bank of Mum and Dad. It’s more likely that the cash will be required as part of a house deposit in circa 10 years. I’d invest it in an Investment Trust, something like that F&C one which is quite diversified and subjec to ‘ordinary’ tax treatment. Or take a punt and buy something more racy like Scottish Mortgage Trust.
Or does she need/want a car?
Or does she need/want a car?
another possible fall out from Brexit is that U.K. investment trusts could go the way of non-EU ETFs.
at present they are regulated as AIFM with an EU Kid document but post 1/1/21 they are going to be treated as a “complex instrument” by some EU trading platforms.
We won’t know for sure until March when the equivalence regime is confirmed but it’s definitely in the balance.
at present they are regulated as AIFM with an EU Kid document but post 1/1/21 they are going to be treated as a “complex instrument” by some EU trading platforms.
We won’t know for sure until March when the equivalence regime is confirmed but it’s definitely in the balance.
Brendan Burgess
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This is the point that I am trying to make.
A pension is completely inappropriate. She does not know when she will need this money, but it's very likely to be in the medium term. She won't thank you Marc, in 47 years time, for having got a higher return on her money, but she could not afford a car or a house.
Brendan
If she is starting college next year I would say she will likely need some of it in the short term (depending on covid restrictions of course) also e.g. the next 1-2 years. The life of a student these days is very much travel, socialising, extra curricular expenses etc. Most students work part-time but even then it's difficult to keep up financially even if your parents are helping and she will likely need a "rainy day fund". Also the parents idea of "paying for college" may be fees and rent - there are a lot more expenses in reality which teh girl may have to fund herself in terms of lifestyle etc! I think some people are quite disconnected from the modern student lifestyle and the priorities of younger people 
When she finishes college at 22 or whatever, and gets her first proper job, t's time enough to look at a pension imo!
When she finishes college at 22 or whatever, and gets her first proper job, t's time enough to look at a pension imo!And this is exactly why the country is under provided in terms of pension coverage.
you are “anchoring” your arguments only to the facts presented without making any 2nd stage analysis.
Let’s take a really simple two stage example
she puts €4,500 into a state savings certificate earning 1% tax free and €500 into a PRSA
Over the next 5 years her state savings will grow to €4,750 give or take what she started with no material impact on her ability to use her savings.
As noted the income tax relief on the PRSA is equivalent to a guaranteed return of almost 50%
Let’s say she starts work after college and of course can then deduct the €228.75 as a tax deduction.
Her pension investment will grow completely tax free no tax returns to deal with no minimum fee brokerage charges or stamp duty. Just a simple clean investment wrapper which facilitates small monthly contributions of just €50pm.
In equities over 5 years her €500 might be worth €669 with no immediate tax to pay on the profit. Whereas an ETF would be worth say €600 after tax.
so the combination of the income tax relief plus the tax free returns make this unquestionably the best return she could possibly assume to make on, and this is critical, a modest sum.
These post all assume that investing in an ETF as a taxable investor in Ireland is like jumping on the Luas. Show me what it costs to buy €500 worth of an ETF and properly account for the tax liability for no higher expected return and makes saving €50 pm possible in a taxable environment- go on please I’m waiting.
Explicitly the poster also mentioned future small gifts.
Materially impacting on the amount of cash she will have available at any given point in the future. This isn’t “all the money in the world” and needs to be wrapped in cotton wool but suggestions to gamble away with an ETF make no sense at all
you are “anchoring” your arguments only to the facts presented without making any 2nd stage analysis.
Let’s take a really simple two stage example
she puts €4,500 into a state savings certificate earning 1% tax free and €500 into a PRSA
Over the next 5 years her state savings will grow to €4,750 give or take what she started with no material impact on her ability to use her savings.
As noted the income tax relief on the PRSA is equivalent to a guaranteed return of almost 50%
Let’s say she starts work after college and of course can then deduct the €228.75 as a tax deduction.
Her pension investment will grow completely tax free no tax returns to deal with no minimum fee brokerage charges or stamp duty. Just a simple clean investment wrapper which facilitates small monthly contributions of just €50pm.
In equities over 5 years her €500 might be worth €669 with no immediate tax to pay on the profit. Whereas an ETF would be worth say €600 after tax.
so the combination of the income tax relief plus the tax free returns make this unquestionably the best return she could possibly assume to make on, and this is critical, a modest sum.
These post all assume that investing in an ETF as a taxable investor in Ireland is like jumping on the Luas. Show me what it costs to buy €500 worth of an ETF and properly account for the tax liability for no higher expected return and makes saving €50 pm possible in a taxable environment- go on please I’m waiting.
Explicitly the poster also mentioned future small gifts.
Materially impacting on the amount of cash she will have available at any given point in the future. This isn’t “all the money in the world” and needs to be wrapped in cotton wool but suggestions to gamble away with an ETF make no sense at all
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